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Investors are pouring cash into US government bond exchange traded funds as bond fever spreads through the market ahead of the Federal Reserve’s expected interest rate cut in September.
BlackRock’s TLT, the biggest ETF tracking long-dated Treasury bonds, pulled in nearly $4bn between the start of August and this Monday, according to data from Morningstar. The fund has had bigger inflows in only three months since it launched in 2002.
The inflows are the latest sign of a comeback for bonds after two years of weak or negative returns, and heavy outflows from fixed income in 2022.
A slowdown in the US economy has prompted investors to seek out the safety of fixed income amid volatile moves in US stocks. Bond yields, which move inversely to price, have fallen this year as expectations have grown that the Fed will cut interest rates from their current 23-year highs.
The demand for ETFs also points to enthusiasm for bonds spreading beyond big money managers and hedge funds, with retail and institutional investors starting to move back into fixed income.
“Investors are very keen on securing these yields before they start falling . . . People are feeling a bit of urgency around that,” said Steve Laipply, global co-head of iShares fixed-income ETFs at BlackRock. Across its suite of Treasury bond ETFs, TLT has taken in the largest flows this year, he said.
TLT is popular because it tracks 20- to 30-year Treasury bonds, a traditional safe-haven investment in moments of market turmoil. It is the third biggest taxable bond ETF, behind Vanguard’s BND and BlackRock’s own AGG, but it has raked in more cash in August than its two far bigger rivals combined, according to Morningstar.
Beyond those three funds, investors have poured $12.2bn into US sovereign bond ETFs so far in August, on track to outpace July, which was the biggest month of inflows since October, according to EPFR data.
In all, taxable bond funds and ETFs pulled in more than $280bn between January and July — outstripping 2023’s full-year total of $225bn, and contrasting with the $204bn in outflows those funds endured in 2022, according to Morningstar.
Fed chair Jay Powell said last week at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, that the “time has come” for rate cuts. Traders in the futures market are betting on more than a percentage point of interest rate cuts before the end of the year, suggesting two quarter-point cuts and one jumbo half-point cut over the three remaining Fed Open Market Committee meetings in 2024.
The flows into US bond funds look likely to continue. Money market funds, which invest heavily in ultra-safe, ultra-liquid government securities, hold more than $6tn in assets, hitting a fresh record in the week to August 21, according to ICI data.
A significant portion of that cash is expected to flow into longer-dated government bonds once the Fed cuts rates, when yields on those short-dated bonds would come down far below those on longer-dated debt.
“People are still sitting in money funds. There’s no rush just yet . . . When the Fed actually cuts — and it will need to be more than just 0.25 percentage points — money will move out the curve,” said Ken Shinoda, a mortgage-backed security portfolio manager at DoubleLine Capital.
Still, he cautioned: “Money is not coming back as fast as it left.”